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- Merton has developed a new powerful method for analyzing consumption and investment decisions over time, and generalized the so-called CAPM (the valuation model for which William Sharpe was awarded the Prize in 1990) from a static to a dynamic setting.
www.nobelprize.org/prizes/economic-sciences/1997/press-release/
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Robert Cox Merton (born July 31, 1944) is an American economist, Nobel Memorial Prize in Economic Sciences laureate, and professor at the MIT Sloan School of Management, known for his pioneering contributions to continuous-time finance, especially the first continuous-time option pricing model, the Black–Scholes–Merton model. [2][3][4] In ...
He is now University Professor Emeritus at Columbia, having meanwhile been awarded the National Medal of Science for founding the sociology of science and for his contributions to sociological knowledge such as the self-fulfilling prophecy and the focus group.
Born:July 31, 1944 New York, New YorkAddress:Harvard Business School Morgan Hall 397 ...1964Faculty Scholar Award, Columbia ...1971-72Salgo-Noren Award for Excellence in ...1977-78Graduate Student Council Teaching Award, ...Jul 26, 2024 · Robert C. Merton, American economist known for his work on finance theory and risk management and especially for his contributions to assessing the value of stock options and other derivatives. In 1997 Merton shared the Nobel Prize for Economics with Myron S. Scholes.
Robert Merton is known for his work on finance theory and risk management and especially for his contribution to assessing the value of stock options and other derivatives. Merton used his background in mathematics to generalize the Black-Scholes formula, created by Myron Scholes and Fischer Black.
- The History of Option valuation
- The Black-Scholes Formula
- Scientific Importance
- Pricing of Derivatives
- Corporate Liabilities
- Investment Evaluation
- Guarantees and Insurance Contracts
- Complete Markets
- Practical Importance
- Some Other Scientific Contributions
Attempts to value options and other derivatives have a long history. One of the earliest endeavors to determine the value of stock options was made by Louis Bachelier in his Ph.D. thesis at the Sorbonne in 1900. The formula that he derived, however, was based on unrealistic assumptions, a zero interest rate, and a process that allowed for a negativ...
This yearís laureates resolved these problems by recognizing that it is not necessary to use any risk premium when valuing an option. This does not mean that the risk premium disappears, but that it is already incorporated in the stock price. In 1973 Fischer Black and Myron S. Scholes published the famous option pricing formula that now bears their...
The option-pricing formula was the solution of a more than seventy-year old problem. As such, this is, of course, an important scientific achievement. The main importance of Black, Merton and Scholes´ contribution, however, refers to the theoretical and practical significance of their method of analysis. It has been highly influential in solving ma...
The method described here has been enormously important for the pricing of derivative instruments. The laureates initiated the rapid evolution of option pricing that has taken place during the past two decades. Options on instruments other than shares give rise to other formulas that sometimes have to be solved numerically. The same method has been...
Black, Merton and Scholes realized already in 1973 that a share can be interpreted as an option on the whole firm (the title of their 1973 article is “The pricing of options and corporate liabilities”). When loans mature and the value of the firm is lower than the nominal value of debt, the shareholders have the right, but not the obligation, to re...
In the choice between different investment alternatives, flexibility is a key factor. Machines may differ in their flexibility regarding the shut-down and start-up of production (as the market price of the product varies), the use of different sources of energy (as, say, the relative price between oil and electricity varies), etc. The Black-Merton-...
Many types of insurance contracts and guarantees can be valued using modern option-pricing theory. Assume that an insurance company wants to determine the value of an insurance contract that protects a bondholder against the risk that the company issuing the bond will go bankrupt. The value of such an insurance contract can be approximated by a put...
Methods developed by Merton (in Merton (1977)) have been used to extend the dynamic theory of financial markets. In the 1950s, Kenneth Arrow and Gerard Debreu (both previous laureates) showed how individuals or companies can eliminate their particular risk profile if there exist as many independent securities as there are future states of the world...
The Chicago Board Options Exchange introduced trade in options in April 1973, one month before publication of the option-pricing formula. By 1975, traders on the options exchange had begun to apply the formula – using especially programmed calculators – to price and protect their option positions. Nowadays, thousands of traders and investors use th...
Merton and Scholes have made important scientific contributions in addition to those described so far. Merton has made fundamental contributions (Merton (1969) and (1971)) to the analysis of individual consumption and investment decisions in continuous time. He presented (Merton (1973b)) an important generalization of CAPM, extending it from a stat...
Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new method to determine the value of derivatives. He is past president of the American Finance Association, a member of the National Academy of Sciences, and a Fellow of the American Academy of Arts and Sciences.
Robert C. Merton. 1944-. R obert Merton, along with Myron Scholes, received the 1997 Nobel Prize in economics “for a new method to determine the value of derivatives” (see the biography for myron scholes for a discussion of the significance of this contribution to knowledge).
